Impressive rally for US wheat

The rally in CBOT wheat futures had a good run last week, posting a 51.25 USc/bu (A$26.51 a tonne) gain before pulling back 15.5 USc/bu on end of week profit taking last Friday night.

The rally was driven by several factors, including the drought in key US hard red winter wheat regions, a cold snap that moved from Siberia across Russia, Ukraine, and Europe, and a reversal of fund investment from being sellers to being buyers.

Wheat is not the only grain pushing higher. US corn has also had a good run, as have soybeans. For those grains, drought in Argentina and wet conditions in Brazil are significant drivers.

The rally in wheat has been impressive. It took nearby futures back above 500 USc/bu for the first time since the third week of July last year. The market has come from a low of around 400 USc/bu since early December. Half of that move came in five trading days.

While it is not surprising that the end of last week saw some profit taking from the rally, the rally itself is strong in the context of the past few years.

Compared to the rally we saw in mid 2017, it is getting close, which implies that the concerns about the current winter wheat drought are close to concerns the market was toying with over the US spring wheat crop in July last year.

While this rally peaked at 515 USc/bu last week, last year’s rally peaked at around 570 USc/bu. That makes it look as though there is still a way to go to match last year. That is true, but we also must remember that last year the market only traded above 515 US c/bu level for a total of nine days.

Outside of last year’s peak in July, longer term charts show that last week’s peak was close to prices seen in June 2016, and then November 2015. The move above 500 USc/bu puts the current market into the upper end of the trading range since mid 2015.

The risk for the market in the short term is that it will get a reminder this week, that US exports are sluggish, and that carryout stocks in the US are at risk of being revised upwards if US wheat is priced out of global markets for too much longer.

However, the forecasts are not showing a lot of relief for the hardest hit parts of the US winter hard red wheat belt, and if the funds have switched from their long term strategy of being net sellers, to net buyers, and hold that position, there would still be another round of price support.

It is also early in the year for the market to be peaking. That can be a two edged sword though. The rally at the moment is basically the market factoring in risk premiums in case the crop is hard hit by drought. Any improvement in conditions could trigger a wave of selling. Equally, there is still more time for concerns to gather pace again.

One of the risks of having the funds as net buyers, is that periodically there are likely to be rounds of profit taking. That selling might deliver sharp price declines if they gather momentum, until prices drop to levels that trigger a new round of buying.